LONDON MARKET CLOSE: Stocks Enjoy Relief Rally As Conservatives Win

Fri, 08th May 2015 16:15

LONDON (Alliance News) - Shares in London roared to a higher close Friday after the Conservative Party won an outright majority in the UK General Election, wiping away the uncertainty of a hung Parliament that had unnerved investors for weeks.

The FTSE 100 added 2.3% at 7,046.82, while the FTSE 250 rose 2.8% at 17,935.93, setting a new closing high after having reached a new intraday high of 18,161.18. The AIM All-Share finished up 0.6% at 753.32.

European indices joined the party, despite Prime Minister David Cameron's pledge to hold an in-out referendum on the UK's membership in the European Union. The CAC 40 in Paris gained 2.5% and the DAX 40 in Frankfurt 2.7%.

Confounding expectations and pre-election opinion polls, the Conservative Party secured an outright majority in Parliament, prompting Labour leader Ed Miliband to follow the leaders of the Liberal Democrats and the UK Independence Party in resigning after their hugely disappointing showings.

The Conservatives secured 331 seats after gaining 24 seats compared with the last election, giving the party a slim outright majority of the 650 seats on offer. Labour won 232 seats, losing a net 26 seats compared with 2010 elections, primarily due to the landslide swing in Scotland, where the Scottish National Party won 56 of the 59 seats on offer, effectively wiping out all other parties and ending Labour's dominance north of the border.

Cameron said the Tories will seek to rebalance the economy, amid concerns about the rise in inequality under the coalition government, and repeated the party's oft-cited desire to create a "northern powerhouse", committing himself to plans to devolve tax powers to Scotland, Wales and Northern Ireland.

The Prime Minister also reaffirmed his party's commitment to holding an in-out referendum on Britain's membership of the EU.

"Although this is far enough down the line to not worry markets at this point...this could become a major market issue as we approach the poll," said Investec analyst Philip Shaw.

On the London Stock Exchange, "the biggest risk for the FTSE and other UK assets in our view was if we got a hung parliament," said Forex.com analyst Fawad Razaqzada. "As soon as it became apparent that this was not going to be the case as had been predicted, the UK markets staged a sharp relief rally."

"The FTSE future spiked overnight and by early trading this morning it was up a cool 150 points as the Conservatives majority victory was priced in, an outcome which has removed the threat of tighter restrictions that were proposed by the Labour party on several sectors of the economy," Razaqzada said.

For example, Shore Capital said the Conservative victory benefits UK housebuilders, especially those with a London focus. "Under a Tory administration we can now expect the re-rating cycle we have mentioned, and this has the scope to raise fair value estimates by 15-20% as we re-base the price to earnings we believe we should apply to projected peak cycle earnings," said Shore analyst Robin Hardy.

Housebuilders were amongst the best performers in the blue-chip index Friday, with Barratt Developments up 7.1%, Persimmon up 5.6%, and Taylor Wimpey up 5.8%. Mid-caps Berkeley Group Holdings rose 9.8%, and Bellway 5.7%.

Societe Generale analyst James Invine said the Conservative win will be supportive of UK bank shares as well. Labour had set out plans to raise an extra GBP1 billion annually from the UK bank levy and a one-off bank bonus tax with an estimated yield of GBP2 billion, which now will not happen. "Beyond specific policies, the Conservatives are generally seen as more business friendly than Labour, particularly if the latter had shared power with the Scottish National Party," Invine said.

Stocks in the banking sector were amongst the biggest gainers, with Lloyds Banking Group up 6.9%, Royal Bank of Scotland Group up 6.1%, and Barclays up 5.3%.

Energy stocks, which also faced restrictions under a Labour government, were amongst the best performers as well, with Centrica up 8.1% and SSE up 5.3%.

Miners Glencore, down 0.3%, and Randgold Resources, down 0.2%, were the only two FTSE 100 constituents closing in the red.

Ladbrokes ended as one of the best performers in the FTSE 250, up 9.1%. There had been concern among bookmakers of the potential regulatory risk posed by a prospective Labour government, as its manifesto included an intention to give local authorities in the UK the power to reduce the number of, or ban entirely, fixed-odds gaming machines from betting shops. Shares in peer William Hill ended up 6.9%.

Away from the election, Just Eat finished as the worst performer in the mid-cap index, down 12%. The online takeaway operator said it will buy Australian online takeaway company Menulog Group for AUD855 million, financed from the proceeds of an equity issue, a move that expands its reach into both Australia and New Zealand.

The equity fundraising is expected to be launched in mid- to late-May, following receipt of the approval of the acquisition by the Foreign Investment Review Board in Australia. Completion of the equity fundraising is expected early to mid June.

The pound rose overnight to a high of USD1.5522 as the Tory lead became clear. However, sterling did not manage to hold those gains and fell against the dollar, as the greenback strengthened after data showed US unemployment rate reached a seven-year low of 5.4% in April, down from 5.5% in March.

Data from the US Labor Department showed that non-farm payroll employment increased by 223,000 jobs in April compared to economist estimates for an increase of about 220,000 jobs. However, the increase in employment in March was downwardly revised to 85,000 jobs from the previously reported 126,000 jobs.

"The report is very mixed and doesn’t really change interest rate expectations. For me, I remain optimistic that [US] interest rates will rise this year, probably in September," said Oanda analyst Craig Erlam.

When London equity markets closed, the pound traded at USD1.5441, while Wall Street was higher, with the DJIA up 1.4%, the S&P 500 up 1.3% and the Nasdaq Composite up 1.2%.

In the economic calendar Monday, there is a eurogroup meeting in Brussels, while the Bank of England releases its interest rate decision at 1200 BST, an announcement rescheduled from this week due to the UK election.

In the corporate calendar Monday, Finsbury Growth & Income Trust, Diploma, Lonmin, ITE Group, GW Pharmaceuticals and Jelf Group release half-year results. Dignity publishes first quarter results, while Spirax-Sarco Engineering issues an interim management statement.